While a few of the questions do refer back to the webinar presentation, most
are self-standing. If you attended the Webinar, you were e-mailed a link to
the archived version which will allow you to review it again. If you did not
attend the Webinar, the archived version of the
webinar
will be available on IRMI.com for purchase through November 2009 if you
are interested in viewing it.

Many of these questions and answers have also been posted in the IRMI Group
on LinkedIn to allow discussion among IRMI Group members. If you are a member
of LinkedIn, join the
IRMI LinkedIn Group and add your thoughts on these issues.

Additional Insured Requirements as a Risk Transfer Strategy

Why do insurance companies allow coverage
to be given away via the use of additional insured endorsements? Why not
end this practice?

This is a question that can only be answered in the home offices of insurance
companies, and you are likely to get a different response at each one. However,
we can discuss some possible reasons.

The first and foremost reason is that the commercial insurance marketplace
is truly competitive. As long as contractors, renters, lessees, and others
are contractually required to add others as additional insureds, these organizations
are going to seek insurance companies that will help them comply with their
contracts and thereby conduct their businesses. To discontinue a common
practice such as this would require an industry-wide approach which would
be tenuous at best. If one insurer were to continue the practice of issuing
additional insured certificates, that insurer would gain a competitive advantage.
Other insurers would most certainly jump ship as well.

Second, probably as many insurers benefit from as are penalized by the
practice. And some both benefit and are harmed by it. For example, consider
construction. Many insurers write both general contractors, which typically
allocate considerable risk down to subcontractors, as well as subcontractors.
Insurers that write general contractors typically expect their insureds
to establish effective risk transfer programs and evaluate them to some
extent as part of the underwriting process. They benefit to the extent that
the policies they write for their general contractor insureds are shielded
by the subcontractors' policies. Those insurers who write both general contractors
and subcontractors cannot very well turn around and refuse to give general
contractors (possibly their own insureds) additional insured status on the
policies of the subcontractors they write.

Of course, insurers that primarily serve as markets for subcontractors
likely would prefer to do away with the practice in its entirety. However,
the competitive marketplace will not allow it. This, we believe, is the
major driver for the restrictive nonstandard endorsements that have emerged
in recent years. They are attempts by insurers to have their cake and eat
it too, by allowing their subcontractor insureds to provide additional insured
coverage while restricting the coverage to a scope deemed acceptable by
the insurer (or, in some cases, restricting coverage to a nearly nonexistent
scope).

This then causes contract drafters to tighten their insurance requirements
to be very specific about the coverage being sought. The result is to place
both agents and brokers in an unenviable position of trying to compare differing
forms to the contract specifications and to cause many subcontractors to
be in breach of their contracts.

We believe that the ultimate solution to this problem is to attack the
main reasons these risk transfers are needed. One reason is third-party-over
actions (where the injured employee of a subcontractor sues the general
contractor for negligently contributing to the cause of the accident). If
the possibility of third-party-over actions was eliminated in every state,
the need for indemnity and additional insured status would be greatly reduced.
Another primary reason is construction defect, which is probably best dealt
with through a combination of quality control programs, warranty programs,
and state legislative reform.

What is the difference between "scheduled"
and "blanket" additional insured endorsements?

A scheduled additional insured endorsement (such as CG 20 10) requires
that the person or organization being given insured status be identified
individually in a list, a "schedule," in the endorsement itself. The alternative
approach to this—sometimes called "blanket" coverage—is an endorsement specifying
that all persons and organizations meeting a particular qualifying threshold
(such as their requirement in a contract that they be made additional insureds)
are automatically insureds under the endorsement, without having to be individually
listed. Following the moniker first used in The Additional Insured Book,
ISO itself refers to endorsements of this kind in their titles as "automatic"
additional insured endorsements.

Other Insurance Issues

Does the CG 00 01 policy form automatically
include primary coverage for an additional insured?

Yes. With certain exceptions, the coverage provided by a standard Insurance
Services Office, Inc. (ISO) commercial general liability (CGL) policy applies
as primary insurance. Coverage would be primary for an additional insured
just as it would for the named insured.

One of those exceptions, however, is that the CGL is excess over any
other policy to which the named insured has been added as an insured by
endorsement. This exception is advantageous for the named insured with AI
status under another standard CGL policy, since it means that the AI coverage
will respond first, before the additional insured's own policy does.

By building this coordination into the standard ISO policy, it became
unnecessary for the additional insured endorsement to specify that it provides
"primary and noncontributory" coverage for the additional insured. Thus,
such contract requirements are generally unnecessary.

You discussed some very restrictive nonstandard
additional insured endorsements that take the opposite approach to the ISO
policy and make the coverage excess over other insurance available to the
additional insured. What would happen if the additional insured was self-insured?

In answering this question, it is first necessary to define what we mean
by self-insurance. In the strictest sense of the word, self-insurance means
"noninsurance." It is the absence of an insurance policy covering the same
risk.

Take, for example, a public entity that does not buy any form of liability
insurance to cover its premises-operations and related exposures. It may
set up loss reserves and fund for incurred losses, rightfully calling this
a "self-insurance program." Since there is no insurance policy, it is also
effectively a noninsured, just as is any organization up until the moment
it buys a liability policy to cover itself. If this public entity were an
additional insured in a contractor's policy, the only liability policy covering
it would be the contractor's policy and it should apply as primary insurance
since there is no "other insurance." This insurer could no more seek participation
in a loss from the municipality than it could from any named insured for
a loss covered by the policy.

The existence of excess insurance over a self-insured retention would
complicate the analysis significantly. Any excess insurance the municipality
purchased—by excess, we mean a policy that is triggered only when a specified
level of loss is met, $1 million, for example—would apply according to its
own provisions. One possible response, again depending on its provisions
as well as the specific provisions of the nonstandard AI endorsement, would
be to come in excess of the greater of its specified self-insured retention
or the each-occurrence limit of the primary CGL policy on which the municipality
is an additional insured. However, another possibility is for the "other
insurance" provisions of the two policies to cause them to share in the
payment of defense costs and any awards or settlements.

If, rather than being a "noninsured," the municipality retains an insurance
company to issue a policy with a $1 million dollar limit of liability and
a $1 million dollar deductible (and thereby operate as a "fronting company"),
the municipality may have the financial equivalent of self-insurance, but
it is now technically an insured under the policy issued by the fronting
company. In this case, the terms of the fronting policy would also influence
the primacy of coverage. If that fronting policy were a standard ISO CGL
form, it would have the provision making it excess over the policy on which
the municipality is an additional insured. Thus the fronted policy should
apply in excess of the policy on which the municipality is an additional
insured. Since your hypothetical involves a nonstandard AI endorsement that
attempts to take the opposite approach from the standard ISO forms, it is
quite possible that a court would decide that the two excess clauses would
work to cause the two policies to share in their responses to the claim.

Certificates of Insurance

Since certificates of insurance are not an
amendment to any policy, when would you ever see a certificate making someone
an additional insured (other than back in the 1980s)?

You're correct that, as a rule, certificates of insurance do not confer
coverage or insured status. However, if an insurance policy includes a provision
that specifically references a certificate of insurance as a means to effect
coverage, this general rule should not apply. Some nonstandard additional
insured endorsements—like the one discussed in the Webinar—actually require
the issuance of a certificate to trigger insured status. With this particular
endorsement, both the endorsement and the certificate would be necessary,
and it could be said that, in a sense, the additional insured was given
insured status by the certificate.

With regard to insurance certificates, when
you consider that you do not have access to the actual CGL policy forms,
should you require that any certificate you receive as an additional insured
actually have the additional insured endorsement attached to the certificate
or have the endorsement form actually be declared on the certificate?

We believe the best "real-world" approach to getting AI status documented
is to require a copy of the additional insured endorsement. Requests for
copies of the named insured's policy itself are, in almost all cases, unrealistic.
And certificates alone—as you rightly observe—confer no actual coverage.
(The one exception to this would be created by those nonstandard additional
insured endorsements, discussed in the Webinar, that require the issuance
of a certificate to trigger AI status under the endorsement. With respect
to endorsements of this kind, an additional insured would, of course, want
to see both the certificate and the additional insured endorsement.)

Miscellaneous Issues

What states have ruled that the scope of coverage
provided to an additional insured may be no broader than the scope allowed
to be transferred under the applicable state's anti-indemnity statute?

The states that have applied the restrictions of their construction anti-indemnity
statutes to the permissible scope of contractually required additional insured
status are California (with respect to residential construction defect claims
only), Colorado, Kansas, Montana, New Mexico, and Oregon. Legislation is
being considered in at least one additional state at this time, and we will
report on these developments in our
Contractual Risk Transfer and
Construction Risk Management reference publications.

I have seen a blanket ISO AI endorsement that
begins with the number "70." When is that used?

ISO has not promulgated any standard CGL endorsements with a designation
beginning "CG 70…." Insurers sometimes use the "70" designation to identify
their own individually filed endorsements. Therefore, you were probably
looking at a nonstandard endorsement developed by the insurer.

Does an additional insured have to remain
on the policies during the named insured's operations only or must it remain
for each year thereafter for some period?

If the additional insured requires coverage for claims arising out of
the named insured's completed operations, then two things must be done:

(1) An AI endorsement that specifically covers completed operations (such
as CG 20 37) must be used; and

(2) That endorsement must be attached to successive policies for as long
as the named insured has agreed to provide completed operations coverage
to the additional insured.

This assumes that a standard occurrence trigger ISO CGL policy is used
to cover the named insured. Remember that it is the occurrence of bodily
injury or property damage that triggers an occurrence liability policy—not
the date that the insured's work is completed—and a completed operations
loss by definition happens after the insured's work is completed.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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